Thursday, January 3, 2013

Four Charts We're Watching in 2013

This is what I will be sending my clients next week:

We remain positive on the outlook for stocks this year.


Our positive outlook is essentially based on three different areas:  corporate earnings; interest rates; and aggressive Central Bank easing, especially from Japan and Europe.

1. Earnings.  Corporate earnings have moved steadily higher since the 2009 recession despite weakness in Europe and China.  Companies have been able to cope with slow revenue growth mostly through efficiencies achieved with the help of technology; however, with operating margins already at record highs, we may see more pressure on earnings in the year ahead:

source:  FactSet
2. Interest Rates. Bond yields moved lower last year, continuing the decline which started almost 30 years ago:

Source: FactSet

Despite low bond yields, individual investors have yet to return to the equity markets.  Roughly $150 billion was pulled out of domestic equity mutual funds last year, mostly in favor of bond funds, which continues the trend seen for the last three years. At some point it seems reasonable that we will at last see a reversal of this trend, particularly since bond yields have so little room to move lower.

Nearly every recession in United States history has been preceded by tight credit market conditions.  Throughout the world, central banks having been adding generous dollops of liquidity to credit markets, allowing borrowers to obtain credit at historically low interest rates. This also means recession is less likely in the foreseeable future.

It is axiomatic on Wall Street that you shouldn't "fight the Fed".  Now add essentially every other central bank in the world to the forces adding tailwinds to the global capital markets.



3. Japan and Europe -  New Japanese Prime Minister Abe took office last month vowing to reignite his country's moribund economy by massive new stimulus policies.  He is pushing the Bank of Japan to target an inflation rate of 2% by injecting huge amounts of monetary stimulus. Some of these policies have been adopted from our Fed's aggressive easing measures - so-called "quantitative easing".

Source: FactSet

Meanwhile, Europe and the euro block staved off disaster in 2012 through a unified policy response that few thought possible.  This doesn't mean that the fundamental problems of the euro have been "solved", but rather that the banking authorities are determined to keep the euro intact until more permanent solutions can be put in place.
Source: FactSet

The aggressive monetary tactics of the Bank of Japan and the European Central Bank are likely to add to stock market gains, much like the results of the Fed's quantitative easing programs in this country.


A Look Back to 2012

Despite a lackluster finish, 2012 proved to be a pretty good year for investors.

The S&P 500 produced a total return of 16%, and now stands just 9% below the all-time highs reached in both 2000 and 2007.

Much of last year's returns were centered in just a few months.  Investors who were tempted to time the market last year for the most part were disappointed:
 http://www.ritholtz.com/blog/wp-content/uploads/2013/01/spxytd2012.png

courtesy: Bespoke; Big Picture

"Staying the course" was a winning but sometimes difficult strategy last year. The market's swoons in May and October were largely the result of reactions to political events in Europe and the United States, and investors who kept a steady eye on value were eventually rewarded